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Cango Inc (CANG -0.75%)
Q3Â 2019 Earnings Call
Nov 15, 2019, 8:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and good evening. Welcome to Cango Inc's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] This call is also being broadcast live on the company's IR website. Joining us today are Mr. Jiayuan Lin, Chief Executive Officer; and Mr. Yongyi Zhang, Chief Financial Officer of the company.
Following management's prepared remarks, we will conduct a question-and-answer session. Before we begin, I refer you to the Safe Harbor statement in the company's earnings release, which also applies to the conference call today as management will make forward-looking statements.
With that said, I'm now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead.
Jiayuan Lin -- Chief Executive Officer
[Foreign Speech] Hello, everyone. Thank you for joining us today on Cango's third quarter 2019 earnings call.
[Foreign Speech] During the quarter, the symptoms of global economic slowdown continue to emerge. Moreover as macro headwinds continue to rise [Indecipherable] global trade on escalating geopolitical tensions have directly impacted China's automotive industry.
To-date the underwhelming performance of China's automotive market in 2019 can face the increasingly difficult industry conditions worldwide. Since the second quarter of 2018 new car sales in China have continuously plunged with no apparent signs of recovery.
Despite new car sales showing sequential improvements during September of this year more time is required to determine whether car sales will continue on this upward trajectory going forward. Following the government's introduction of policies to stimulate new car sales, we have observed a certain level of confidence in the market. With this new policies implemented in the marketplace, we expect the Chinese auto market to start turning the corner in the second half of 2020.
[Foreign Speech] For the auto financing market in particular the low penetration rate of auto financing services
still represents a promising opportunity for our future expansion especially in lower-tier markets. Meanwhile, we are also exploring growth opportunities in other emerging verticals such as the market for electric vehicles. We believe that by seizing these opportunities, we will offset the current challenges in auto financing industry caused by the decline of new car sales in China.
[Foreign Speech] It is important to remember that while the Chinese auto industry is entering to a period of transformation, we've noticed a reshaping of the auto financing market dynamics. Going forward, we expect this evolving market dynamics to lead to increasing industry consolidation.
As challenging market conditions put weaker companies to the test market leaders like Cango with sizable economies of scale, high service quality and superior operating capabilities. We'll be able to secure additional market share.
[Foreign Speech] During the quarter, we remain committed to executing our growth strategy by continuing to strengthen our core competencies on auto loan facilitation services, expand our aftermarket services and accelerate our cooperative efforts with more core strategic partners. We once again achieved solid growth despite the challenging market conditions.
[Foreign Speech] In the third quarter of 2019, our total revenues increased by 23.2% year-on-year to RMB351 million. Our aftermarket services facilitation business, which mainly consisted of insurance-related products contributed RMB40.7 million. It is worth mentioning that total revenues of the company in the first three quarters of 2019 reached RMB1.039 billion approaching a level of RMB1.091 billion for the whole year last year.
[Foreign Speech] I will now provide an update on the progress we achieved this quarter as well as the growth prospects of our core auto loan facilitation business, aftermarket services, and strategic partner initiatives.
[Foreign Speech] First as our core growth driver, our auto loan facilitation business continues its move alone in high-growth trajectory. In the third quarter, the total amount of financing transactions facilitated reached RMB5.769 billion with the total outstanding balance reached RMB36.501 billion. On the funding side, we continue to actively engaged in negotiations for potential collaborations with multiple financial institution.
[Foreign Speech] We also maintained our market leading position as the largest auto financing service platform in China in terms of new car dealership coverage. By the end of the third quarter, we have grown our dealership network to more than 49,000 registered dealers across 353 cities nationwide.
In addition to consistently expanding our geographical coverage, we also optimize the coverage of our dealership network. By the end of the third quarter, our sales team has established a direct coverage for 94.1% of our dealers.
The significant penetration and range of our dealership network has enabled us to determine the needs of the dealers more precisely, while improving our solutions in real time. These improvements have helped us to augment our service quality further positioning us ahead of industry competition.
[Foreign Speech] Secondly, we continue to expand our aftermarket services to propel our car insurance facilitation business into the next growth cycle. In the third quarter of 2019, our aftermarket services business contributed RMB40.71 million or 11.6% to our total revenues. Our car insurance facilitation service is completed 6,912 transactions in the third quarter up 21.3% from the previous quarter.
[Foreign Speech] Thirdly, we continue to make progress in our cooperation with core strategic partners. As mentioned in the previous quarter, we are the first auto financing service platforms to completely interface with ICBC's loan system for new car purchases. Following the completion of this system interface, loan volumes made through our cooperation continue to increase. Through our partnership with ICBC and the utilization of our extensive national coverage. We have coordinated with a number of OEMs to launch OEM-subsidized auto financing and promotion services throughout China. To replicate the success of such collaborations, we are also actively engaging with more OEMs for future collaboration.
[Foreign Speech] As part of our partnership with Didi, we completed the facilitation of 327 car purchase transactions for licensing Didi drivers during the third quarter. We also continue to provide Didi drivers with a complete suite of auto solutions including car sourcing, auto financing, insurance product and operator licensing.
[Foreign Speech] Moreover, we continue to accelerate the development of our auto transaction facilitation business by fostering closer ties with OEMs through our strategic partnership. Through such collaborations, we are able to leverage our extensive dealership network and strong lower-tier city penetration to expand these OEMs sales channels.
Moreover, we are also enabled these OEMs to diversify their product offerings to meet the various needs of their targeted consumer demographics. Additionally, we are also actively exploring other cooperation opportunities such as retail and wholesale cost sourcing. Following the collaboration agreements we signed with several major OEMs in the previous quarter we continue to engage in partnership negotiations with more domestic and foreign OEMs in the third quarter.
[Foreign Speech] In summary, despite the macroeconomic uncertainties and widespread industry deceleration, we believe that we will sustain our robust growth momentum by continuously refining our product offerings, enhancing our service capabilities and cultivating various forms of strategic partnerships.
As the industry rebalances amid these turbulent market conditions, we are confident in our ability to further solidify our market leading position.
[Foreign Speech] With that I will now turn the call over to our CFO, Michael Zhang to review our financial performance in the quarter.
Yongyi Zhang -- Chief Financial Officer
Thanks, Jiayuan. Hello, everyone, and welcome to our third quarter 2019 earnings call.
Before I start to review our financials for the quarter, please note that unless otherwise stated all numbers are in RMB terms and all percentage comparisons are on a year-over-year basis. In the face of macroeconomic headwinds and ongoing contraction of China's automotive industry, we maintained our growth momentum in the third quarter of 2019 posting strong financial and operating performances.
Our total revenues in the third quarter of 2019 were RMB351.3 million, representing a year-over-year increase of 23.2%, outperforming the high end of our guidance by 8.1%. Our aftermarket services facilitation business also continue to ramp up as revenues grew to RMB40.7 million or 11.6% of our total revenue in third quarter. Cost of revenue in third quarter was RMB125.4 million or 35.7% of our total revenues compared to RMB113.5 million or 39.8% of our total revenue in the prior year period.
As a result, we expanded our gross margin to 64.3% in the third quarter from 60.2% in the prior-year period, mainly attributable to the successful implementation of series of cost control initiatives and the increased leverage resulting from improved economies of scale. Sales and marketing expenses in the third quarter decreased by 1.9% to RMB47.6 million from RMB48.5 million in the prior year period.
As a percentage of total revenues, sales and marketing expenses in the third quarter decreased to 13.5% from 17% in the prior year period. This decreases further illustrate our commitment to improve our sales and marketing efficiency while maintaining the strong growth trajectory of our total revenues.
General and administrative expenses were RMB52.3 million or 14.9% of total revenues in the third quarter compared with RMB40.7 million or 14.3% of total revenue in the prior year period. This increase was mainly driven by higher share-based compensation expenses during the quarter. Research and development expenses in the third quarter increased to RMB13.2 million from RMB10.8 million in the prior period as we continue to expand our R&D efforts and investing product innovation.
As a percentage of total revenue our R&D expenses remained stable at 3.8% in the third quarter. As a result of our strong revenue growth and a successful optimization of cost structures, our income from operations in the third quarter increased by 17.8% to RMB89.7 million from RMB76.2 million in the prior year period.
Our net income in the third quarter was RMB122.1 million, increasing 14.9% from RMB106.3 million in the prior year period. Our non-GAAP adjusted net income, which excluded impact of share-based compensation expenses increased by 21.5% to RMB146 million in the third quarter. On a per share basis, our diluted net income per ADS was RMB0.78 and our diluted non-GAAP adjusted net income per ADS was RMB0.94 in the third quarter of 2019.
Moving onto our balance sheet as of September 30, 2019, we had cash and cash equivalents of RMB1,851.2 million compared with RMB1,609.6 million as of June 30, 2019. Looking forward to the four quarter of 2019, we expect our total revenue to be between RMB380 million and RMB400 million.
Please note that this forecast reflects our current and preliminary view on market and operational conditions which are subject to change. This concludes our prepared remarks. Operator, we're now ready to take questions.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Cai with Morgan Stanley. Please go ahead.
John Cai -- Morgan Stanley -- Analyst
[Foreign Speech] Thank you management for taking my questions. I have two questions. The first question is about risk. I see that the overdue ratios has been increased sequentially. I just wonder was that impacted by the regulatory tightening on collections or there's other factors. How do we see the trend of this overdue ratio? The second question is about the regulations over the loan facilitation model. The PBOC Shanghai branch has recently issued a document trying to tighten the commercial banks funding to loan facilitation platforms. Just wondering how would impact our cooperation with funding partner? Thank you.
Jiayuan Lin -- Chief Executive Officer
[Foreign Speech] First of all thank you for your question. Let me take your first question that is the changes in the overdue rate. Well actually we've already talked about this issue during the quarterly analyst meetings. As we all know that's the, yes, the regulatory environment over collection is changing.
And so as early as this, I mean, in the earlier part of this year, we've already taken -- we have already taken measures to control M0 and also M1 overdue ratios, and we are stepping up our collection methodology especially telemarketing based collection methodology to control these M0 and M1 overdue ratios.
And if you look at the end of Q3 numbers, yes, indeed the overdue ratio have only increased. And I think the main reason is due to the long holidays during the September and October. For example during September and October we have the autumn Festival -- Mid-Autumn Festival and also the National Day Festival. So because of these holidays that the collection efforts have to some extent been impacted.
And so that's why at the end of September we are seeing the rising M1 overdue ratio, but we have been following the trends very closely in October and also in November. And we can see that our measures especially our control measures are taking effect. If you look at the changes in M1 after the holidays, you can see that thanks to our efforts, the M1 ratio has been going down and this testifies to the effect of our controls.
And in M3 we all know that it's partly impacted by the changes in M1 and it's a rolling effect. So we expect that in the next quarter, the M1 ratio as well as M3 ratio will remain stable and also we believe that there will be some improvement over the ratios.
[Foreign Speech] All right. I will answer your question on the impact of regulatory changes on our business especially our partnerships with the banks. Actually we have consulted with our legal department and also we have consulted the legal opinions from the major partner and banks as well.
In fact, I mean, in fact based on our findings Cango's partnership model with the banks are fully in line with the regulatory requirements. In fact, since the regulatory policies were published more bank especially more major banks are coming to Cango looking for partnerships with us.
So when they come to us we ask them especially these banks, legal department if there will be any trouble with compliance if we lease partner with Cango and actually based on our legal opinion our partnership models with these banks definitely do not stand against the regulatory requirements. So we don't have any concerns compliance wise.
[Foreign Speech] I would like to add a few words on this point. Recently, we have noticed that the senior official from CBIRC talked about the regulator's position on loan facilitation business and those facilitation platforms.
And according to this senior operational actually the regulator holds an open-minded approach to loan facilitation business and the regulators actually are very much in favor of this loan facilitation business and they always call this open mindset to watch this loan facilitation business.
And actually the publication of series of new regulatory documentation in fact helps raise the threshold of these loans facilitation industry, and we believe that with higher threshold to enter into this industry and with changing market dynamics.
In fact, we believe that this will help facilitate the healthy development of this industry because it means that the whole market will become better regulated and also will be more concentrated and we believe that all these news in fact is in favor of the long-term growth of the industry.
[Foreign Speech] Thank you.
Operator
Thank you. [Operator Instructions] Your next question comes from Lucy Li with Goldman Sachs. Please go ahead.
Lucy Li -- Goldman Sachs -- Analyst
[Foreign Speech] The first question is on ICBC and the contribution from ICBC related loans. I would like to know in the past quarter also how much loan volume is contributed by this channel and what about the fee rate. Going forward in the next year or two, what do we expect the ICBC channel would bring that in terms of loan volume and margin? As the business didn't go as expected what would be the main challenges? The second question is on the financial statement. There are two items. One is that the interest income. The other one is the other income. I would like to know the major reason for the quarterly fluctuations? Thank you.
Jiayuan Lin -- Chief Executive Officer
[Foreign Speech] All right. I will take your questions. About the first question actually our business with ICBC started to grow considerably since June. In the past few months actually we've been focusing in our partnership with ICBC on non-OEM-subsidized products targeting lower tier market in China.
So you can see that the take rate has not changed very much over the past few months. And the main reason is, as I said earlier, this is mostly non-OEM-subsidized product category. And our partnership with ICBC you can also see that the cost of funding for us is relatively low and that's resulting lower APR and also very stable margin for us.
So you can see that the take rate compared with other type, I mean, take rate of this product compared with other types of products. We don't see any significant decrease. It has been very stable and this trend has also been reflected in our financial data.
And in the future in terms of OEM-subsidized product category we expect the margin to go lower because the take rate is indeed lower for OEM-subsidized product and as we talked before OEM-subsidized products, their unit price is relatively high and the vehicle gross margin is of course impacted by this kind of a characteristic of this product category.
And so that also in turn has an impact on our take rate. So you can see that because of the higher unit price than the -- in our financial statements both the gross margin and the net profit margin will stand at a very good level. And because in our cost structure we have higher level of fixed cost. So we don't really see any negative impact in terms of gross margin and also net margin in the ICBC's OEM-subsidized product category, no negative impact.
[Foreign Speech] In terms of contribution from ICBC partnership. Well, if you look at new business metrics of every month then it's about 20% to 25% contribution for new business every month.
[Foreign Speech] But again this is non-OEM subsidized product category.
[Foreign Speech] And on your second question. Changes in two items in our financial statements. First of all other income. Other income mainly includes the tax incentives from the government. So it's a kind of a government grant items. That's why we have a quite big changes quarter-over-quarter.
[Foreign Speech] And the second item interest income. Well for this quarter actually consists of two parts. The first is the bank deposits about RMB14 million and so you can see that it's relatively stable quarter-over-quarter, and the second part is RMB27 million from the payment of structural product of numerous trust. So you can see that's why we have some changes because of this second part.
[Foreign Speech] Thank you.
Operator
Thank you. We have a follow-up question from John Cai from Morgan Stanley. Please go ahead.
Jiayuan Lin -- Chief Executive Officer
Hello John?
John Cai -- Morgan Stanley -- Analyst
[Foreign Speech] Thanks management for taking my questions. My question is about the cost of revenue as a percentage of total revenue this number declined to around 36% in 3Q. So just wonder in particular the commissions we paid to car dealerships. What's the ratio at the moment and more broadly can management comment on the competition landscape on the sector obviously the other sales is under pressure. So in terms of this loan facilitation, the competitions. Do we see the competition getting more intense or otherwise and how should we look at these cost efficiencies going forward. And there's also a mention of our cost-control initiative. Is there any more details or colors on that? Thank you.
Jiayuan Lin -- Chief Executive Officer
[Foreign Speech] Okay, thank you very much. I will take your questions. The first question is about the changes in our cost of sales and we are still seeing -- I want to explain to you why the cost of sales has reduced overall and also I will talk about the structure of our cost of sales. Actually the cost of revenue as a percentage has dropped significantly as you pointed out we can break it down into two parts in terms of the cost of revenue.
The first one is variable cost and that includes, of course, the commission that we pay to the dealers. And now let's look at the auto financing services for new cars this market segment. In fact, in this market segment, we are seeing, a much less fierce competition compared with last year. There are several reasons for this, of course, including changing dynamics in the auto market regulatory changes as well as the market's liquidity.
So if you look carefully you won't see that in the new car market segment. Some international platforms and also small and medium-sized players they are actually are exiting from these market segment. They are turning toward the second hand market or car for loan service market. So that's why in the new car segment, we have seen less competition than the previous year.
And that of course has helped to maintain a stable level of the commissions for dealers. And in fact we are seeing lower commission rate for dealers because of the factors I just mentioned. And last year, for example, we often saw some market -- some marketing actions like quarterly or monthly promotional programs or campaigns.
And this year, however, we have seen very few or even no structural marketing initiatives. And these trends have a very good or positive impact on our commission rate and that has contributed to the reduction in our cost of sales or revenue.
And the second factor in the cost structure is the cost of labor cost. While labor cost include loan underwriting and also loan collection as well as loan servicing. And since this year we have setup our performance management programs for the control of all these labor cost items. And well while business growth in fact we have not seen linear increase in our human cost -- human resources costs as well as headcount.
And that has a very good impact on the positive impact to the cost burden. So that's why as our business grow, we are in fact see more benefits on the operating leverage wise. So these are the two reasons why the cost of sales for core business has dropped in the last quarter.
[Foreign Speech] And the market dynamics are changing and we are seeing definitely higher concentration level in -- over the whole industry in the next three to five years. So as one of the market leaders Cango definitely will be in a very good position to maintain our margin and our net profit as our business grows.
[Foreign Speech] Thank you.
Operator
Thank you. [Operator Instructions] There are no further questions at this time. This does conclude our question-and-answer session. I would like to turn the call back over to management for any closing remarks.
Jiayuan Lin -- Chief Executive Officer
[Foreign Speech] Thank you for joining us today and I look forward to more discussions with you and we will definitely bring you more good news in terms of our business performance.
[Foreign Speech] Thank you.
Operator
[Operator Closing Remarks]
Duration: 51 minutes
Call participants:
Jiayuan Lin -- Chief Executive Officer
Yongyi Zhang -- Chief Financial Officer
John Cai -- Morgan Stanley -- Analyst
Lucy Li -- Goldman Sachs -- Analyst
